President William Ruto announces his Cabinet Secretary nominees at State House in Nairobi, Kenya, on July 24, 2024, following nationwide protests over new taxes. IMAGE: William Ruto
In Summary:
- Investors are increasingly avoiding Kenyan Treasury bills and bonds, intensifying the government’s fiscal challenges after its pivot to domestic borrowing following the abandonment of tax hikes.
Kenya’s fiscal outlook is becoming increasingly precarious as risk-averse investors shy away from long-dated Treasury bills and bonds, according to recent data from the Central Bank of Kenya.
This trend is exacerbating the government’s financial woes as it struggles to pivot to domestic borrowing following the abandonment of controversial tax increases.
The latest debt sale, held on August 1, highlighted the severity of the issue, with the benchmark 1-year Treasury bill attracting less than 10% of the expected demand.
The weak demand is driving up the cost of borrowing and complicating efforts to fund the budget of the already debt-burdened government.
“This is a significant problem that the government seems to be postponing,” remarked Kenneth Minjire, a senior associate for debt and equity at the Nairobi-based brokerage AIB-AXYS.
The situation stems from President William Ruto’s decision to scrap tax hikes worth more than 346 billion shillings ($2.67 billion) in the wake of widespread protests that resulted in over 50 deaths.
This policy reversal forced the finance ministry to increase its domestic borrowing target by 42% to 404.6 billion shillings ($3.12 billion), despite the underperformance of securities at recent auctions, excluding 91-day Treasury bills.
Sharp Decline in Demand:
The central bank’s data reveals a dramatic decline in demand for Kenyan debt instruments at its weekly auctions, coinciding with the eruption of domestic unrest and violence in major urban areas.
During the week of June 24, investors offered to purchase only one-third of the Treasury bills on offer, while the subscription rate for bonds plummeted to a mere 2.4%.
Before the unrest, Treasury bill subscription rates stood at 94.7%, and bonds were regularly oversubscribed.
Despite these troubling indicators, Central Bank Governor Kamau Thugge sought to allay concerns, emphasizing that it is still early in the financial year and that the revised borrowing target remains lower than the previous year’s figure.
“I believe we will meet our domestic financing requirements,” Thugge asserted at a news conference on Wednesday.
The finance ministry, however, has not responded to requests for comment.
Concerns of Over-Borrowing:
The issue of over-reliance on domestic debt is also a growing concern.
Finance Minister John Mbadi, in his recent address to a parliamentary vetting panel, noted that Kenya’s total domestic debt now stands at 750 billion shillings, three times the amount of external debt.
“We are borrowing too much domestically,” Mbadi warned, though he did not indicate whether he would consider reducing the domestic borrowing target.
Mbadi faces significant challenges in curbing domestic borrowing.
The Kenya Bankers Association, a key industry lobby group, has cautioned that the withdrawal of the funding bill and subsequent credit rating downgrades could further restrict access to external financing options.
Additionally, the declining value of Kenya’s Eurobonds suggests that issuing new bonds would come at a higher cost.
Potential IMF Funding Delays:
Adding to the fiscal strain are potential delays in receiving International Monetary Fund (IMF) support.
Kenya had reached a staff-level agreement for the seventh review of its $3.6 billion bailout before the protests, but the IMF board has yet to approve the deal.
The government has submitted a revised economic plan, excluding the abandoned tax hikes, in hopes of securing the next $600 million tranche.
However, President Ruto’s efforts to compensate for the lost tax revenue have yielded mixed results.
Although he pledged to cut 346 billion shillings in government spending, the final legislation only approved half that amount, increasing the risk to the country’s financial stability.
Fitch, the global credit rating agency, recently downgraded Kenya’s credit rating, citing the increasingly difficult path to achieving fiscal targets.
“The path to achieving fiscal targets has become increasingly challenging,” said Fitch, the global credit ratings agency
The situation remains tense, with ongoing protests and near-weekly calls to prevent any further tax increases, such as those on fuel.
“We must stay glued to the issues,” urged opposition leader Martha Karua.
The Kenyan shilling is currently trading at 129.50 to the U.S. dollar.